In some cases, setting up a franchise system may be impractical or cost prohibitive. In such circumstances, you need to consider licensing certain aspects of your business’ intellectual property to third parties. Essentially, a licence gives the third party the right to use your intellectual property usually in return of a fee. Unlike a franchise, the level of control that is exercised by the licensor is far less as they cannot dictate how the business is owned and operated. The business relationship usually just allows the third party to use the name of the licensor’s business to trade with whilst protecting other aspects of the business. A word of warning here: a business should not use a licensing system in an attempt to get around the complicated requirements for a franchise.
Many countries have strict legislation regulating franchising and courts will look to construe an arrangement narrowly as a franchise agreement where there is a dispute and penalise the purported licensor for trying to get around the franchise requirements. The quality of the drafted documentation will be crucial in how a court will determine the matter, so specific expertise will be required to guide you through this legal minefield.
An example of where this went wrong was a café business where the owner did not want to go through a franchise model and spent a great deal of money trying to avoid it. The café business was a successful one in a particular location in South East Queensland, Australia. They had a large turnover and had developed intellectual property and systems that could easily be replicated in other businesses. This meant that their brand was attractive to other investors. They were approached by an investor who wanted to buy a franchise. However, the business owner did not want to go through the franchise process but still wanted to maintain a great deal of control over the business. As a result, they set up a licence to the third party, but maintained sufficient control so that they were effectively a franchise in breach of the Franchising Code of Conduct in Australia (Code). Once a dispute occurred, the licensee successfully argued that the licensor was in breach of the Code because they did not set up a franchise properly under the Code. The licensor had to pay back all of the money paid by the licensee and the licensee walked free from all of their obligations in relation to the business. Had the relationship been set up as a franchise, the licensee would not have been able to get out of the system.
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